Remittances for Investment: An Innovative Source of Development Financing

While the ambitious, 169-point Sustainable Development Goals are still being solidified, the next big question in development will most certainly be how to finance them. Official development assistance (ODA) as a share of national GDP in many developing countries has been steadily shrinking, and identifying other sources of financing is crucial. Already, discussions here at the CSIS Project on U.S. Leadership in Development have focused on Domestic Resource Mobilization (DRM) and the importance of strengthening national tax bases and collection systems to increase the funds available for investment in national economic growth.

Western Union is one of the largest remittance services in the world. Pictured here, an outlet in Angeles City, Philippines.

Another source of overseas assistance with potential to impact national development is remittances. Remittances from diaspora populations are usually sent to families of the migrants working abroad, and as such have a limited, micro level effect. Yet global remittances already triple the value of official foreign assistance. Leveraging these inflows – which total in the millions and billions of dollars per country each year – to invest in public funds for infrastructure and social entrepreneurship may, however, contribute to more long-term, macro level economic growth.

A pilot initiative from the Aspen Institute and Rockefeller Foundation aims to do just that: the Diaspora Investment Alliance will attempt to channel investments from diaspora populations into donor advised funds (DAFs) in their home countries. Individuals can make tax-deductible donations to DAFs as with any charitable account, and the fund’s administrators provide grants to selected nonprofits while investing a portion of the funds in securities until a future need arises, making DAFs useful funding mechanisms for targeted grants and a depository for disaster assistance.

One example of this type of fund is the Philippine Philanthropic Fund, a partnership among Aspen’s Diaspora Investment Alliance, Charities Aid Foundation America, and the Commission on Filipinos Overseas. The Philippine Philanthropic Fund will facilitate strategic contributions from Filipinos living abroad back to their home country. Amounts can range from small, $100 donations to charities vetted by the NGO Transparency Portal, to larger investments in capital markets, bonds, and social enterprises.

Similarly, USAID and the Calvert Foundation announced the development of an Indian Diaspora Investment Initiative earlier this year, which will allow Indian Americans to invest in Indian financial institutions that will then lend to social enterprises in India, while earning the investors annual interest payments. India has raised money from its diaspora before, issuing government bonds on several cash-strapped occasions, however this latest effort will funnel money not into the government treasury but into financial institutions lending to nonprofits that normally lack access to credit.

Which other countries are best positioned to benefit from diaspora investments? According to World Bank data on bilateral remittance flows from 2014, the countries receiving the largest inflow of remittances were:

Unsurprisingly, the results indicate that populous countries with large numbers of migrant laborers receive the most money from remittances, and could thereby benefit immensely from DAFs incentivizing diaspora populations to invest in national economic growth. Since the United States is one of the largest sources of remittance outflows, the data in the chart above is largely consistent with remittances sent from U.S. immigrants back to their native countries. In terms of remittance totals sent back from the U.S., Mexico, China, India, and the Philippines also rank in the top four.

However, there is another set of countries in which diaspora remittances could make a strong contribution to development finance. As opposed to total remittance flows, the chart below shows the top 15 countries where remittances accounted for a high percentage of national GDP in 2013.

Eastern European countries and small coastal states in Central America and West Africa top the list. Their governments, as well as those of India, China, the Philippines, Mexico and the like, are in a strong position to leverage the relative success of their diaspora populations to contribute to national economic growth. With limited funding from bilateral agencies and multilateral organizations, which are already stretched thin on funding the SDGs, remittances and accompanying DAFs and investment platforms are an important source of home-grown development finance that will only increase in the future.

Ariel Gandolfo is a researcher with the Project on U.S. Leadership in Development.